Palm Still Pining For Next Year (PALM)

Palm (PALM) isn’t having trouble selling its Treo and Centro smartphones: It sold 1 million of them last quarter, up 49% from a year ago. But it is having trouble making money off them: The company lost $42 million last quarter on $367 million of revenue.

Palm’s big hope: That long-awaited, top-secret new phones running a long-awaited, top-secret operating system will show up next year and command higher prices and higher margins.

But the good news for Palm is that the market for smartphones is growing like a weed. Citigroup expects the smartphone market to grow 50% to 60% annually for the next several years. Citi thinks smartphones will comprise 22% of the overall mobile phone market next year, up from less than 9% in 2006.

Obviously, Palm’s executives want to take share from rivals. But because the market’s exploding, if Palm simply keeps its current market share — about 3% — it will be in good shape. For instance, if Palm can keep its unit sales growth — and, more importantly, its revenue growth — in line with the market, next year’s August quarter sales could be closer to $550 million — and the following year, more than $800 million.

The key: Figuring out a way to either charge more for its phones — or spend less to make them — so Palm’s margins get into the black. Or else none of this means anything to Palm’s investors, including private equity firm Elevation Partners, which put $325 million into the gadget maker last summer.